Legal Scuffles in Louisiana

Cigarette settlement, food sales tax in question

SHREVEPORT, La. -- Louisiana has become ground zero for two legal efforts that will certainly affect convenience retailers in that state and one that could extend to retailers across the country.

The first is a lawsuit that arises from the 1998 legal settlement requiring major tobacco companies to hand over $206 billion to the states. According to the lawsuit filed on Aug. 2, that settlement actually created a government-protected cartel that keeps cigarette prices artificially high, according to a report from the Associated Press.

The lawsuit, brought by the Competitive Enterprise Institute, a Washington, D.C.-based free-market advocacy group, is aimed at Louisiana and its attorney general, Charles Foti, who is in charge of enforcing the agreement. Similar actions have been filed in five other states by different challengers.

The plaintiffs in the Louisiana lawsuit include a tobacco-distribution company and two small cigarette manufacturers not covered by the original settlement and now forced to make escrow payments. Other plaintiffs are a discount cigarette store in Shreveport, La., and a smoker who lives in Shreveport who claims he is forced to pay artificially high prices for cigarettes.

No tobacco companies are named as defendants in the suit, which was filed in federal court in Shreveport.

The landmark agreement between 46 states and major tobacco companies, requiring payments to be made over 25 years, settled all of the state's lawsuits over the public costs of treating ill smokers. However, to receive their shares, states were required to pass laws requiring nonparticipating cigarette makers to make escrow payments. In addition, Louisiana passed a law making it a crime to sell cigarettes made by any company not covered by the settlement that does not make escrow payments.

The lawsuit alleges that those escrow payments drove up competitors' costs and "erected barriers to entry and expansion that ensured the majors would maintain their market shares despite their dramatic price increases to pay off the states."

In essence, the states have become the biggest stakeholders in the business of the major tobacco companies and have "used the power of government to protect their newfound allies." The lawsuit claims the agreement violates the commerce clause of the U.S. Constitution, federal antitrust laws and federal laws forbidding state regulation of tobacco advertising.

The lawsuit asks that the settlement be declared unconstitutional and for a ban against Louisiana enforcing the settlement or any of the state laws associated with it. The lawsuit gives no indication whether the state would have to repay any of the settlement money.

Citing antitrust issues, discounters and other tobacco companies have filed similar challenges in Oklahoma, New York, Kentucky, Tennessee and Arkansas. Although the suit is aimed only at Louisiana, a victory likely would trigger lawsuits in other federal court districts. The tobacco companies are not being sued because "the violation here is Louisiana entering into this agreement with other states."

In the second effort, the Louisiana Department of Revenue on Wednesday launched a public campaign to stop convenience stores that are improperly charging a state sales tax on some food items.

A recent survey showed that at least one-third of the state's 2,500 convenience stores are charging the 4% sales tax on food sold for home use that was eliminated by the state's Stelly Tax Plan adopted by voters in 2002, revenue secretary Cynthia Bridges told the Louisiana Gannett News Service. The tax plan swapped lower sales taxes for a higher income tax.

The department has launched a campaign to inform both consumers and store owners that convenience stores should not be charging the nearly 4% state sales tax on food for home consumption or food that requires some additional preparation by the buyer.

Stepped-up enforcement will include suspending the alcohol and beer sales licenses of stores that continue to charge the tax, Bridges said.